On-Balance Volume (OBV)

On-Balance Volume (OBV) is a technical analysis indicator that measures the cumulative buying and selling pressure of a financial instrument over a specified period. It was developed by Joseph Granville in the 1960s and is used to identify potential trends, confirm price movements, and predict trend reversals.

The OBV indicator is based on the principle that volume often precedes price movements. It calculates a running total of the volume by adding or subtracting the volume of each trading period based on whether the price closes higher or lower compared to the previous period.

Here's how the OBV is calculated:

1. If the closing price of the current period is higher than the closing price of the previous period, the volume for the current period is added to the previous OBV value.
   
   
2. If the closing price of the current period is lower than the closing price of the previous period, the volume for the current period is subtracted from the previous OBV value.
   
   
3. If the closing price of the current period is the same as the closing price of the previous period, the OBV value remains unchanged.
   
   

The OBV values are plotted on a chart, typically as a line graph, with the y-axis representing the OBV values and the x-axis representing the time periods.

Traders use the OBV indicator to analyze the relationship between volume and price movements. When the OBV line is trending upwards, it suggests that buying pressure is increasing, indicating a potential uptrend. Conversely, when the OBV line is trending downwards, it suggests that selling pressure is increasing, indicating a potential downtrend.

Traders also look for bullish and bearish divergences between the OBV line and the price action. A bullish divergence occurs when the price makes lower lows, but the OBV line makes higher lows. This could indicate a potential upward reversal. Conversely, a bearish divergence occurs when the price makes higher highs, but the OBV line makes lower highs. This could indicate a potential downward reversal.

The OBV indicator can be used in conjunction with other technical analysis tools and indicators to confirm signals and make more informed trading decisions. However, it's important to note that the OBV indicator has its limitations, and it should be used in combination with other analysis techniques and risk management strategies for effective trading.